11 November 2014

Corporations are Turning More to Bond Markets And Away from Banks

Corporation have options for financing not available to noncorporate businesses. Specifically, they can issue bonds, borrowing directly from investors in addition to borrowing from banks. Since the Great Recession, as banks have put as much effort into correcting balance sheets as originating loans, this has been a real advantage.

Since 4Q 2008, corporations have increased their reliance on bonds 10.3%, even as they've decreased their use of mortgages (down 7.3%) and bank loans (down 3.3%). By contrast, noncorporate businesses have increased mortgages (up 1.5%) and bank loans (a paltry 0.2%). (All stats are reported at an annualized rate.) They have not increased their use of bonds, of course, for the simple reason that for them it is not an option. This has meant a big difference in levels of credit. While corporate liabilities have increased by 20%, noncorporate business liabilities have increased by only 4%.

As a gross generalization, credit and capital aren't limits in today's economy. But when it comes to the experience of specific noncorporations (and many households) credit is a limit. Until this changes, it's just one more reason why the current expansion will be less robust than it could be. And one more way that corporations have an advantage over noncorporate businesses.